Contract types and what they do to your books
Contract type determines who carries the risk of a cost overrun, how you get paid, and how much of the government's accounting apparatus applies to you. It is the single fact that most shapes a GovCon company's books.
The four you will encounter
| Type | Who carries cost risk | What you bill |
|---|---|---|
| Firm-fixed-price (FFP) | You. Price is set regardless of what it costs you. | A fixed amount, on delivery or on a milestone or payment schedule. |
| Time and materials (T&M) | Shared. You carry the risk on the hourly rate; the government carries it on the hours. | Hours at fixed loaded rates by labor category, plus materials and ODCs at cost. |
| Cost-plus-fixed-fee (CPFF) | The government, within the funded ceiling. | Allowable incurred cost plus indirect at provisional rates, plus the fixed fee. |
| IDIQ / vehicles | Depends on the task order. | Nothing — the vehicle is a hunting license. Task orders under it carry their own type. |
Firm-fixed-price
The simplest to bill and the riskiest to perform. You are paid the price whether the work costs you half that or double it. Accounting requirements are lighter: no incurred cost submission driven by the contract, no provisional rates, no cost vouchers.
That lightness is a trap for a company that has not job-costed the work. Without cost by contract, an FFP portfolio can be losing money on half its contracts and the company will not know until the aggregate margin moves. Job cost your FFP work even though nobody is going to audit it.
Note that FFP with progress payments based on cost pulls the accounting system requirements back in.
Time and materials
You bill hours at fixed loaded rates by labor category. The rate is fixed for the contract term, so any increase in your labor or indirect cost comes out of your margin. Three things follow:
- Category compliance matters. Hours billed in a category have to be worked by someone who meets that category's qualifications. Substituting a junior person into a senior rate is a common and serious finding.
- Actual cost still has to be tracked. You bill at rates, but you need cost by contract to know whether the rates are covering you. T&M contracts erode quietly as salaries rise.
- Material is different from labor. Materials and ODCs are typically reimbursed at cost, and where FAR 52.216-7 applies to that portion, an incurred cost submission may be required even on a T&M contract.
Cost-reimbursement
You are reimbursed allowable, allocable, reasonable cost plus a fee. This is where the full apparatus applies: an acceptable accounting system before award, provisional billing rates, monthly public vouchers, an annual incurred cost submission, and final rate settlement.
Two clauses govern how hard the funding ceiling bites. Limitation of Cost (FAR 52.232-20) and Limitation of Funds (FAR 52.232-22) require you to notify the contracting officer when incurred cost is expected to reach a stated portion of the estimated or funded amount within a defined period. Miss the notice and you may perform work you cannot get paid for.
Three numbers per task order. The gap between funded and incurred is your notification trigger; the gap between incurred and billed is working capital you have already spent.
IDIQ and vehicles
An IDIQ, GWAC, or schedule contract is a right to compete for task orders, not revenue. The accounting consequence is structural: you need a job cost hierarchy that puts task orders under the vehicle, because rates, ceilings, and periods of performance live at the task order level while the labor category rate structure often lives at the vehicle level.
Contractors who set up each task order as a standalone job lose the ability to report at the vehicle level. Contractors who roll everything to the vehicle lose the ability to manage a ceiling. Build the hierarchy at the start.
Frequently asked
Do we need a compliant accounting system for firm-fixed-price work?
Not on the basis of the contract type alone. FFP with progress payments based on cost is different — that pulls the accounting system requirements back in. And you should job-cost FFP work regardless, or you will not know which contracts make money.
Is a T&M contract subject to an incurred cost submission?
Sometimes. Where the material or ODC portion is reimbursed at actual cost and the contract carries FAR 52.216-7, a final indirect cost rate proposal may be required. Check the clause list rather than assuming T&M is exempt.
What is the difference between funded value and contract value on a cost contract?
Contract value is the estimated total. Funded value is what has actually been obligated. You can only be paid against funded dollars, and the limitation of cost and limitation of funds clauses require notice as incurred cost approaches those thresholds.
How should IDIQ task orders be structured in the accounting system?
As children of the vehicle, with funded value, ceiling, and period of performance at the task order level and the labor category rate structure at the vehicle level. Flat structures make ceiling management and vehicle-level reporting difficult later.
Related
Job cost accounting by contract and task order
Accumulating cost by contract, task order, and CLIN so that job cost, the general ledger, and your billings all agree.
Read →Billing and invoicing government contracts
How to bill each contract type, what a public voucher has to show, and how to shorten the gap between incurring cost and collecting on it.
Read →Indirect rate structure: fringe, overhead, and G&A
How the three-tier pool and base structure works, how the rates stack, and what changes when you use a value-added G&A base.
Read →